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Give Life Insurance Firms Free Hand in Capital Market
China's insurance companies should be allowed to trade directly in the stock market so to develop mature unit-linked products that can help them deal with monstrous potential risks facing the life insurance sector, said experts and officials.
Unit-linked products allows insurance companies to make long-term investments using premium income. Returns from these investments can be distributed to policyholders in addition to certain fixed amounts specified in insurance contracts.
Investment returns can be large or small in accordance with investment results and policy holders should bear the risks outlined in their contracts.
Unit-linked products are an important part of life insurance products in developed markets, while in China, the first such product has just been developed by the Ping An Insurance Company of China.
Unit-linked products will enter the mainstream of China's life insurance products, said Chen Wenhui, director general with life insurance regulatory department under the China Insurance Regulatory Commission (CIRC).
"The CIRC will energetically support the development of unit-linked products and will loosen its regulation of these products," he said.
The watchdog is considering giving more favourable treatment to these products in terms of tax treatment and by opening more investment channels, but Chen said this will require the co-operation of other governmental departments, including the taxation bureau and securities regulators.
"We should let insurance funds directly enter the capital market instead of indirectly by purchasing securities funds," Chen said.
China's insurance companies can only make money by using bank deposits, treasury bonds, State-level corporate bonds, interbank lending, and purchases of securities funds.
The narrowness of the channel, especially a lack of most profitable direct stock investments, has hindered the profitability of China's unit-linked products.
According to statistics provided by Skandia Insurance Co Ltd, a Swedish insurer with years of successful experience in premium investments, investing in stocks in most countries usually brings better returns than bank deposits and bonds over a long term such as 10 years or more.
"That is also the situation with China," said Jan Carendi, deputy chief executive officer with Skandia.
Establishing a healthy interactive relationship between the insurance funds and securities funds will not only help insurers with their claim settlement dilemmas, but will reduce speculative moves on the securities market, said senior economist Wu Jinglian at a recent seminar.
The fledgling Chinese insurance industry is facing monstrous hidden risks. Its investment returns on premiums have declined annually because of continuous drops in interest rates of bank deposits and treasury bonds.
Although nominal rates of life insurance products have also dropped several times in line with the interest rate cuts, existing policies with high rates amount to a colossal sum for life insurers.
"China's insurance industry is bearing risk values of about 15 trillion yuan (US$1.8 trillion)," said Wu. "However, the overall capital assets of all insurers are no more than several dozen billion yuan."
"The government did well by allowing insurance funds to enter the securities fund market last year, and more capital market opportunities will appear in the future," he said.
But, the opening of the securities market to insurance funds should be gradual and steady because both the stock and insurance markets still need to be standardized and regulated, said Wu.
China's stock market is immature in its nontransparent information release system, frequent violations of securities rules and irregular behaviour, said Wu.
"Hopefully the market can be rectified and standardized in two or three years," he said.
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